Question

Which of the following would NOT shift the AD curve?a) Interest rates rise, which reduces investment spending. b) The economy improves and people start spending more. c) An increase in market power occurs in the airline industry. d) The federal budget is reduced to tackle the deficit problem.

Answer 1

Answer:

Answer is c.

Explanation:

The AD curve is a result of the aggregate demand/aggregate supply model. It shows how total demand and total supply interact at the macroeconomic level.  The AD is made up of 4 components: consumption spending, investment spending, government spending, and spending on exports minus imports. The AD curve shifts if there is a change of its components. So

• for a: as the investment spending reduces the AD curve would shift to the left
• for b: as the consumption spending increases the AD curve would shift to the right
• for d: as the government spending decreases the AD curve would shift to the left

However, an increase in market power of the airline industry doesn't mean the increase of any aggregate demand of the macro economy. Therefore answer is c.

The aggregate demand curve, or AD curve, shifts to the right as the components of aggregate demand—consumption spending, investment spending, government spending, and spending on exports minus imports—rise. The AD curve will shift back to the left as these components fall.